Chemical and Citibank Marketing $235 Million Republic Health Credit

Chemical Bank and Citibank are marketing a new $235 million credit for Republic Health Corp., a Dallas-based company that emerged from bankruptcy last year.

The new loans are part of a major recapitalization, which will result in a dramatic deleveraging of the company's balance sheet.

The loans, along with $106 million of fresh equity, will be used to refinance $93 million of existing bank debt owed to Citibank, and to retire $228 million face amount of subordinated debentures at a discount.

Following the recapitalization, the company's debt-to-equity ratio will shrink to less than 1.3 to 1, from 7.7 to 1 currently.

"We're moving from a highly leveraged company to a much, much less leveraged one," said Brian Marsal, president of Republic Health, and a partner in Alvarez and Marsal Inc., a turnaround firm which guided Republic out of bankruptcy.

Despite the deleveraging, Republic agreed to pay a steep rate on the new loans, amounting to 300 basis points over the London interbank offered rate.

Republic needed the loans in a hurry so it could close on the repurchase of the subordinated debt. Also, banks are generally leery of lending to the heavily regulated healthcare industry, which is subject to the whims of government reimbursement policies for patients covered by Medicare and Medicaid.

New Sources of Equity

Most of the subordinated debt that is being repurchased by Republic is held by Pacific Asset Holdings. As part of the deal, Pacific Asset is injecting $51 million of new equity into Republic.

Joseph Littlejohn and Levy, a turnaround firm in New York, is investing another $55 million of equity in Republic.

Mr. Marsal said he probably overpaid by about 50 basis points on the bank loans, but felt it was worth it, because Republic will save almost $30 million on the repurchase of the subordinated debt at a discount.

At the same time, the agent banks probably needed the high pricing to ensure that they can syndicate the loan.

Indeed, despite the high spread, some bankers said last week that they rejected the deal virtually out of hand because they are nervous about lending to the healthcare industry.

"It's not for the faint of heart," one banker said.

Also, Republic is still haunted to some extent by its past.

"This was one of the original LBOs to go into bankruptcy, and everybody recognizes the name," one banker commented.

Republic was taken private in 1986 by Donaldson, Lufkin and Jenrette, and filed for Chapter 11 in December 1989.

Republic operates suburban hospitals in Florida, Texas, California and Indiana. A little over 50% of its patients are covered by Medicare, Mr. Marsal said.

He acknowledged the risk of changes in reimbursement rules, but added, "I can live with that."

As for the banks, they will be well compensated for that risk, considering Republic will emerge from the recapitalization with an interest coverage ratio of over 3 to 1 on an operating basis, he added.

"We are eagerly looking at the deal right now," said one bank official who attended a syndicate meeting Thursday in New York.

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